The spillover effect of bank distress: Evidence from the takeover of Baoshang Bank in China

Abstract

The recent US regional banking crisis has gained considerable attention due to its potential for contagion and amplification of shocks. This paper employs the difference-in-differences method to examine the spillover effects of a regional bank failure on its peer institutions. By focusing on the bankruptcy case of Baoshang Bank in China, which serves as a natural experiment, we show that the bank's bankruptcy leads to a substantial increase in the riskiness of its peers’ loan portfolios. Specifically, our findings reveal a more pronounced impact on group-based loans, while digital credit remains unaffected. This study introduces a novel mechanism through which bank distress spillovers, providing valuable insights for financial institutions to optimize their lending strategies and for policymakers to make informed policy and regulatory decisions.